Colombia Likely to Keep 5.25% Rate Unchanged as Inflation Slows

April 30 (Bloomberg) -- Colombian policy makers will
probably keep borrowing costs unchanged today for a second month
as the lowest inflation rate in Latin America gives them time to
gauge the impact of previous interest rate increases.

The seven-member board, led by bank chief Jose Dario Uribe,
will maintain the benchmark rate at 5.25 percent, according to
all 27 economists surveyed by Bloomberg. The bank will announce
its decision after markets close at 1 p.m. in Bogota.

The central bank has raised the key rate nine times in 13
months, pushing it to the highest in almost three years in
February, to tame prices amid a consumer credit boom. With
inflation slowing in four of the past five months and analyst
expectations within the target range, the policy makers can
afford to stay on hold today, said David Rees, an emerging
markets economist at Capital Economics Ltd. in London.

“Rate hikes are probably off the cards in the near-term,
given falling food and energy costs bringing down inflation,”
Rees said in an e-mailed response to questions.

Colombia has defied a global trend for lower rates, as
record oil output and a 22 percent expansion in credit helped
power 5.9 percent growth in 2011, the fastest since 2007.

Retail sales surged 9.4 percent in February from the year-ago period, boosted by the leap year, as industrial production
increased 4.5 percent.

Regional Low

Even as sales surge and output rises, inflation slowed to
3.4 percent in March, compared with 5.24 percent in Brazil, 3.8
percent in Chile and 3.73 percent in Mexico. Colombia targets
inflation of 2 percent to 4 percent.

Inflation will end this year at 3.29 percent, according to
the median estimate in a central bank survey published April 12,
down from a projected 3.45 percent in the March survey.

Colombia’s IGBC stock index has gained 19.5 percent in
2012, the best performance among Latin America’s six biggest
exchanges. By comparison, Brazil’s Bovespa has gained 8.7
percent, while Mexico’s IPC index is up 6.1 percent and
Argentina’s Merval is down 7.8 percent.

The yield on Colombia’s 6.125 percent dollar bond maturing
in 2041 has declined 132 basis points, or 1.32 percentage point
in the last year to 4.49 percent on April 27. The price has
risen 22.4 cents on the dollar to 126.18 cents.

Inflationary Pressures

Colombia’s central bank is “very confident” inflation
will slow to 3 percent as economic growth eases to 5 percent,
Uribe said in an April 13 interview.

Still, the bank remains concerned by credit growth, which
may create risks if it continues at its current pace of more
than 20 percent for a prolonged period, he said.

At its March 23 meeting, the board noted that though
inflation expectation have fallen and the rate of total lending
has stabilized, “several” board members said higher borrowing
costs may still be needed.

“Inflationary pressures continue to weigh on the risk
balance, which means additional adjustments in monetary policy
might be necessary,” policy makers said in the minutes.

Given the government’s concern that the peso’s 9.9 percent
advance against the dollar this year is hurting the nation’s
manufacturers and farmers, policy makers may prefer to use other
measures such as reserve requirements to curb lending, Rees
said. The peso has gained more than any other Latin American
currency since Jan. 1.